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Inside the Market This TSX sector is doing just as well as energy this year - but many investors aren’t noticing

While oil prices have received most of the credit for the recent comeback in Canadian stocks, the lesser-watched industrials sector has quietly been on a tear as well.

Since the S&P/TSX Composite Index turned the corner in early February, industrial stocks as a group are up by 17 per cent and hit a record high Wednesday, led by the performance of the railways and supported by a broader cast of transportation, construction, industrial-equipment and industrial-services companies. That equals the gains of the Canadian market’s energy sector.

As a sector that tends to be closely aligned with broad economic conditions, industrials have gained strength from U.S. and Canadian growth, while so far proving resilient to uncertainty surrounding renegotiations of the North American free-trade agreement and the tensions between the United States and its major trading partners.

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“You’d think with all the trade concerns, it would be one of those sectors held back a little,” said Ryan Bushell, president and portfolio manager of Toronto-based Newhaven Asset Management Inc. “It just shows how strong the economy is.”

On Wednesday, Canadian National Railway Co. shares surged to a record high after second-quarter earnings blew past expectations. Year-over-year profit growth of 27 per cent prompted the company to increase its 2018 outlook, citing no ill effects from U.S. President Donald Trump’s tariffs on cross-border shipments.

“Demand is extremely strong and the demand outlook for the remainder of the year is strong, as well,” CN’s newly appointed chief executive, Jean-Jacques Ruest, said on a conference call with analysts on Tuesday.

Canadian Pacific Railway Ltd., meanwhile, is not far off a record high after posting an earnings beat of its own last week.

Both companies seem to be benefiting from economic tailwinds and a surge in demand for shipping crude oil by rail amid a pipeline bottleneck. “The railways are in great shape right now,” Mr. Bushell said.

And as go the rails, so goes the industrials sector in general. The two companies together account for more than half of the market capitalization of the S&P/TSX Composite Index industrials sector.

But there are other industrial stocks providing meaningful contributions to the main Canadian index.

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Waste Connections Inc. also exceeded analysts’ estimates on Tuesday, adding to a long streak of earnings beats, and building on a stock run that has seen little interruption. Over the past five years, the waste-management company’s share price has risen by an average of 26 per cent each year – a mark the stock is on course to reach again this year.

Toromont Industries Ltd. rounded out a trio of earnings beats by Canadian industrials on Tuesday. After the Caterpillar construction-equipment dealer trounced the Street’s forecasts, Toromont’s shares rose by 15 per cent to a record high on Wednesday.

But the industrials sector, although relatively small in Canada, is diverse, making it difficult to generalize across a wide variety of companies.

Jennifer Radman, who manages the Caldwell Canadian Value Momentum Fund, maintains an industrials sector weighting in excess of 40 per cent of the fund, based not on a sector call, but rather on a bottom-up stock selection process.

Ms. Radman pointed to the range of industrial stocks owned by the fund, such as ATS Automation Tooling Systems Inc., which provides factory automation services; Cargojet Inc., an overnight air-cargo company benefiting from e-commerce growth; WSP Global Inc., an engineering firm; and Ag Growth International Inc., which supplies farming-infrastructure equipment.

If the stocks in the industrials sector do have something in common, it’s that their fortunes tend to be tied to swings in the economy.

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And making economic predictions is a particularly tough game these days, given the trade risks associated with an unpredictable U.S. government.

“It’s basically a binary outcome: zero or one,” CIBC deputy chief economist Benjamin Tal said in a recent interview with The Globe and Mail. “Zero would be everything is fine, we will find some sort of resolution to NAFTA, there will not be a trade war with China – and that’s very bullish for markets and economic growth. One is the other possibility, where we have a full-scale trade war, NAFTA is destroyed and we have a much more negative impact on stock markets and economic growth.”

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